Private enterprises typically prepare financial statements when applying for a loan or seeking equity investments, whereas public companies use them for more complex earnings reports. Both entities adhere to the same accounting standards in preparing financial statements, though the principles are not always relevant for private firms.
The current GAAP model, for instance, requires aggregation of operating units in a consolidated statement. But banks typically ask private companies to de-consolidate statements when making decisions to lend.
“One-size U.S. GAAP does not fit all companies, especially smaller privately held businesses,” said Gregory J. Anton, chairman of the American Institute of Certified Public Accountants.
Supporters of the new council say there are up to 15 GAAP standards that are irrelevant to private companies. Lenders, they say, focus on core earnings, liquidity and short-term cash flow when making loans to private companies.
Critics argue that the modification of existing principles to cater to private companies will create a bifurcated system that will diminish the quality of financial reporting.
For now, the Financial Foundation is in the process of pulling together a nine to 12-member team to serve on the council. The foundation will put out a call for nominations in early June. It wants a mix of financial statement users, preparers and auditors to provide a well-rounded perspective on the issue, said Terri Polley, president and chief executive of the Financial Foundation.
She expects the council to begin meeting in the fourth quarter and start conducting research, develop proposals and go through due process. The board will consult the Financial Accounting Standards Board, a ward of the Financial Foundation, on all proposals.
The Foundation’s decision comes after nearly two years of heated debates within the financial services community about modifications to GAAP. The Accounting Institute convened a panel in 2009 to recommend the best course of action to address private company concerns. Out of those meetings came the idea to form a separate council that would have reported to FASB. In the end, the foundation chose to directly oversee the council.
Polley said while the council’s efforts are solely focused on the needs of private companies, its proposals to simplify GAAP standards could have positive implications for public companies.
“Complexity of financial reporting is really at the root of the problem, not just for private companies, but also public companies,” she said. “Some of the insights that we gain from the private company stakeholders will result in simplification for everybody.”